Here is an article that I wrote on my blog last May.
Let me know what you think.
This is the question I get all the time. When I hear it, I cry inside. Literally…
Yes, I know that we live in a society where finance and money management are not very sexy topics and that most people have no idea of what they can/should do with their money once they actually managed to save some.
But I still get bubbles in the brain when I hear these words: “What do you think I should do with my money?”.
Well first things first, I don’t think you should do anything with it. I don’t care. This is your money; YOU should know what YOU want to do with it. Don’t just ask people what you should do with it!
If you are actually asking this question to people or even to yourself, it means you haven’t done anything with it and that you are not planning to do anything about it. You are just waiting for someone to tell you what to do, and you hope that you will get richer by just following the instructions...
So my first advice is: don’t listen to anyone else ! (and also don't ask me this question anymore) This is your money, so YOU should know what you want to do with it. You can politely listen to any advice, but at the end of the day, only you make the decisions. So keep only what’s useful to you and forget the rest.
People are so desperate and so lazy that they expect a nice short answer like: “buy Stock A and bond B”. People who ask this question don’t realize this is the wrong question to ask. A better question would be something like: “What do I want to do with my money?”.
Depending on what your goals are for your money - buying a house, starting a firm, planning for retirement, saving for a car or for your children's education, getting high returns – you will make different choices about your investments. Defining these goals and knowing what you want your money to do for you is the first step in your investment decision.
Ok, now let’s say you have a slight idea of what you want to do with your money. You want to invest it for A, B and C. What do you do? If you are like most people, you do nothing. You just stare at your bank statements each month and pat yourself on the shoulder because you are actually saving money. Yeah sure, you know there are some things you could do with your money like investing in the stock market or buy some shares in a mutual fund or something like that. But it all sounds very complicated and you heard on the television that the economy is bad and you also heard about that story about people who got scammed and lost everything. At least you are saving money and your money is safe, in the bank’s vault. Also you are lazy, or you really don't have time for that, you are so busy with kids, the job, the last episode of game of thrones...
Let me be clear: the worst thing you can do with your money is nothing!
Why?
Well, first there is inflation of course (use a condescending tone if you quote me); the average inflation rate for the last 20 years was between 1.5% and 3.5 %. It means that everyday your money is sitting in the bank, it is worth a little less. And that’s really not the biggest problem. If you don’t invest in anything you are not making any returns. The average yearly return in the stock market is around 8% after inflation. This is of course on average, but it means that on a long enough period, you will make 8% after inflation on your investments on the stock markets. If you have not invested any of it, you are basically losing this opportunity of 8% plus inflation.
It also works with other types of investment: any money you don’t invest will suffer both from inflation and from the opportunity cost. You could have invested that money in bonds, in real estate, in a business or even a savings account or a retirement plan. You would still have some return compared to your amazing 0% that most checking accounts offer.
Now you should feel a bit worse inside. Good, it means there's still hope for you.
In his book “I will teach you to be rich”, Ramit Sethi makes a nice analogy between food and money. He compares our food and fitness habits with our personal finances habits and shows that people focus on the little details more than the core issues. Like for example how people debate about eating more carbs or more veggies, which types of supplements you should buy, what kind of exercises are best for your abs or biceps. But every one of us knows what the basic principles are to be fit: eat less (and better) and exercise more.
It’s the same with our money: don’t focus on which stock to pick or which fund to buy, don't get lost in the details and the huge amount of data. You just need to start investing now. You can make any investment in the world, you will still be better off than doing nothing with your money. Of course discussing how to invest will also be important in your investment process, but in the long run not investing your money will be what really hurts you.
On average, millionaires invest 20% of their household income. On the average !
So next time you want to ask the dreadful question, ask yourself instead "What is my next investment?".
To get started:
First step: write down what you want to do with your money. What are your goals, projects ? And when will you need the money, 5-10-20 years ?
Second step: start investing today, put your money on a savings account and pick one investment for your goal.
In future articles, I will discuss asset allocation, diversification and the different types of investment options.
http://money-management-advice.weebly.com/articles/what-should-i-do-with-my-money